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Don’t stress over your student loan

19/04/2018

Don’t stress over your student loan

With student debt at a record high (average £50k), the Government has promised a major funding review. We flesh out the facts about student loans and explain why piling on the pounds may not be a reason to panic after all.

The lowdown on student loans, and why not to worry…

Your student loan is not real debt.

A  £50k debt might seem daunting, but actually the amount you borrow is not too important, it’s how much you repay that counts.
 

  • Unlike commercial loans, repayments are calculated on how much you earn, not on how much you owe (amount borrowed + interest). And if you don’t earn enough, you don’t repay. You only start paying back your loan once you earn more than £25k.
     
  • Then you repay 9% of your annual income over £25k.
    So say you’re on £30k, you earn £5k over the threshold, therefore you pay back £450 a year (= 9% of £5k). That’s £37.50 a month. And whether you borrowed £50k or £50m, your repayment is the same.
     
  • Any unpaid debt is wiped after 30 years. Based on the £25k threshold introduced in 2017, the Institute for Fiscal Studies reported that 83% of graduates will not pay back the total amount they borrowed. Only the very highest earners will repay in full. 

 

You may never pay a penny back, or you may clear the total debt… but your annual repayment will never amount to more than 9% of your income, and for a maximum of 30 years.

Basically, the psychological connotations of ‘being in debt’ are worse than the financial reality. So if you can get your head around the fact that your student loan is not real debt, you should start feeling better about it. As Martin Lewis (Money Saving Expert) explains, it is more like a graduate tax or ‘contribution’.

It’s always nice to earn a little money along the way, of course… Next time, we’ll be looking at some of the ways to boost your income during your student years, and get some valuable experience on your CV at the same time.

 

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